Argos parent sees profits &#163;20m higher than forecast

Home Retail Group upgraded its full-year profit forecasts yesterday after reporting robust Christmas trading, but warned that lower-income customers at Argos are continuing to feel the chill winds of the economic downturn.

Terry Duddy, the chief executive of Home Retail Group, which also owns Homebase, said that the DIY chain had benefited from wealthier customers having more money in their pockets, partly from lower mortgage payments, but this did not represent the financial reality of the socio-demographic of many Argos customers. "Argos reflects the mass market position... and I don't think those people have more money and they continue to be cautious."

For the 18 weeks to 2 January, Argos posted flat underlying sales – up just 0.1 per cent – compared with a 4 per cent increase at Homebase. This was the third consecutive quarter that Homebase had delivered growth.

Andrew Hughes, an analyst at UBS, said: "Argos sales were strong in electricals and toys but affected by weakness in games and furniture."

Mr Duddy cited "excellent cost management across both businesses". As a result of this and better than expected gross margins – the difference between the price at which a retailer buys stock and the price it sells it for – at Argos, Home Retail said it expects full-year group pre-tax profits to be about £20m ahead of the current market consensus of £265m.

Analysts at UBS said that Argos's gross margin, while down by 250 basis points, was 25 bps better than it had expected. The main reason for the fall in margins at Argos and Homebase, down by 375 bps, was the depreciation of sterling. Total sales at Argos and Homebase rose by 3.9 per cent and 4.6 per cent respectively.